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Abstract

A number of existing studies have examined the theoretical link between financial development and economic growth. Kose et al. (2010), among others, have argued that financial development can affect the extent of the benefits from foreign direct investment. Other studies, such as Huang (2010) have suggested that the quality of political institutions can also affect the level of financial development. This implies that the extent of the benefits from financial development also depend on the quality of governance. However, few empirical studies have considered these issues. By making use of panel data over the period 1970 to 2009, this paper focuses on the impact of the interaction of (i) financial development and foreign direct investment and (ii) financial development and the quality of governance on economic growth in South Asia. Our empirical analysis, suggests that financial development has contributed to an increase in the benefits of FDI in South Asia. In addition, improvement in political rights and civil liberties has also enhanced the benefits of financial development in South Asia.